ARPUs in social networks and social games: An acronym that needs scrutiny

How do
you monetize social networks and social games? Similar to the online games
space, there is a growing consensus that the answer is by complementing
advertising with a virtual goods micro-transaction business model. Social
networks and start-ups are positioning themselves accordingly. Hi5 has announced
its own virtual currency. Facebook is now implementing “credits” and MySpace seems
to be working on their own payments platform. Jambool provides virtual
currency, while Gambit, Zuora and Spare Change offer a variety of direct payment
methods. Users can pay for virtual goods by completing offers or surveys thanks
to SuperRewards, OfferPal and Sometrics while Zong and MobillCash let them pay
with their cellphones. Live Gamer provides a publisher-supported secondary
market for virtual good trading. It is only a matter of time until services
emerge that optimize electronic storefronts – layout, inventory, pricing and
promotions – and virtual goods marketing campaigns.

The
pitch for the micro-transaction business model is simple. There is a higher user
monetization relative to advertising revenues because of the type of engagement
that occurs in social communities and games. Central to this argument is the
metric for user monetization: Average Revenue per User (ARPU).The figure below shows several public
estimates of annual ARPUs[1].
The apparent wide discrepancy is misleading because of the different ways of
defining ARPU. If analyses based on ARPU segmentation, such as average ARPU
levels by game/app type and characteristics, or by social platform and region,
will inform key decisions about design and user acquisition marketing budgets,
these inconsistencies may result in wrong and costly decisions.

The R in ARPU

Benchmark’s
Bill Gurley estimates Facebook’s annual ARPU of $2.57[2] by
dividing the company’s annual revenue by its monthly active users. One might
mistakenly take this number as the ARPU of a Facebook user, yet this value does
not factor in that the user is also monetized by third party applications –
both through ads and micro-transactions. Developer Analytics estimated in August 2008
that more than 20 Facebook Apps had monetization potential of $2,000 per day[3].
Following the terms in its contract with application developers, Facebook
virtually sees none of this revenue. The only micro-transaction revenue that
Facebook itself generates is through its virtual gifts, which accounts for
$50-$60MM[4] of
annual revenue. In other words, $2.57 is how much Facebook, as the platform,
monetizes on an average user, not the monetization value of a Facebook user. If
Facebook wanted to increase its own ARPU, it could simply develop more of its
own apps with micro-transaction models or it could change terms of contracts
with developers in order to get a larger cut from their revenue.

Jeremy
Liew from Lightspeed Ventures estimates ARPU for Jagex’s MMO Runescape
(freemium game) as $0.84/month/user[5].
In contrast, all user monetization in Runescape hits Jagex’s top line as they have
no third party apps.

Why are
there no public estimates on the monetization value of a Facebook user? It is
hard to get data to estimate the aggregate revenue across all Facebook app developers.

The U in ARPU

At the
SXSW conference, Susan Choe, CEO of Outspark (a publisher of Free-to-Play online games),
announced $50 monthly ARPUs, creating strong reactions until the audience
started concluding that she was probably referring to ARPPU – average revenue per
paying user. This illustrates the definition
issue with “users”. Different definitions of a user dramatically skew the ARPU numbers:

·
Registered users: They sign up or install
game/app, but may use it very infrequently (if at all) and they never pay.
Minimal or non-existent monetization.

·
Active users: They use app or play game with a
certain frequency, but never pay for anything. Monetization only through ad
revenue.

·
Paying users: They pay for purchasing digital
assets or for subscriptions at least once or with a certain frequency.

Even
within these categories, companies might define users differently. The
differences in the numbers because of varying definitions are in the orders of
magnitude. As an example, in his ARPU vs.
ARPPU blog post[6],
Raph Koster estimates monthly ARPUs in freemium successful models as
$0.50-$1.50, versus $30-$35 monthly ARPPUs for subscription games.

Returning
to Jeremy Liew’s Runescape ARPU estimate, he reached $0.84/month/user by
dividing the monthly runrate ($5MM) by the 6MM Runescape players, 5MM of which
play for free. If he had used, the 1MM subscribing paying users, he would have concluded
with an ARPU of $5.00/month/user.

Proposed Standard Definition

Many of
these inconsistencies can be addressed if as an industry we were to adopt a
standard definition. Here are my thoughts around a standard definition but
would like to hear yours.

ARPU –
Average Revenue per User where:

–
Revenue is defined to include all monetization
of the user within the social networking platform, virtual world or game,
including:

o
All revenue models: advertising,
micro-transactions, subscriptions, player-to-player, etc. This introduces a
“share-of-wallet” mentality where the revenue model ARPU can be specified (e.g.
advertising ARPU, micro-transaction ARPU)

o
All parties that monetize on the user within a
platform, world or game. Hence, the ARPU of a Facebook user includes both
revenues to the Facebook platform and to its third-party application
developers

–
User is defined as a registered user – a user
who has signed up or installed software

o
Part of the ARPU optimization process will
include the conversion of registered users into active ones, and in turn, into
paying ones

–
Time horizon is specified (e.g. monthly ARPU
versus annual ARPU)

ARPPU –
Average Revenue per Paying User same as ARPU, but where:

–
Paying User is defined as any registered user
who made any payment since signing up, whether for a purchase or a
subscription.

o
The process of payment will have required the
user to set up a payment method (e.g. input credit card details, link to Paypal
account). Hence, the barrier for further payments is significantly lower.

This
proposed definition includes several key caveats:

–
Differences in registration process (e.g.
filling in long list of user details versus auto-registration by visiting a
site) will still make apple-to-apple comparisons slightly misleading

–
At times, subscription and micro-transactions
are not fully separated. In some games and worlds, paying a subscription also
gets you a certain amount of virtual currency for micro-transactions

–
Difficulty of ARPU measurement across several
parties (e.g. a platform and hundreds of application developers) and across
revenue models

–
ARPU definition will require more specificity,
e.g. monthly micro-transaction ARPU

As the
micro-transaction business model gets more traction, we will see a spike in
claims of ARPU figures. These will vary wildly – at times because of their
nature, at times because of the metric definition. Caveat emptor.

About the author

Nima
Pourshasb is director of corporate development at Live Gamer. His background
includes Business Development at MTV Networks, where he led M&A deals with
social media properties, and a Senior Project Manager role in strategy
consulting at Oliver Wyman, specializing in Emerging Markets. He holds an MBA
from Harvard Business School,
during which he worked part-time at venture capital firm General Catalyst,
helping launch an online advertising company. Other work experience includes Goldman
Sachs and PWC, and he also holds a Masters in Engineering from Imperial College,
London.

Live
Gamer is leading the way in legitimizing player-to-player virtual economies,
working in partnership with publishers and developers to realize the growth and
impact RMT of virtual goods has on game design, player experience and online
communities. www.livegamer.com

---

[1]
Sources for the data points are listed in the following footnotes.

[2]
Above the Crowd, How to Monetize a Social Network, 3/9/09 http://abovethecrowd.com/

[3]
Inside Social Games, 8/26/08 http://www.insidesocialgames.com/2008/08/26/facebook-games-make-money-according-to-developer-analytics/

[4]Silicon
Alley Insider, 11/11/08 http://www.businessinsider.com/2008/11/facebook-stock-now-worth-about-4-billion-

[5]
Jeremy Liew, Light Speed Ventures, 6/9/08 http://lsvp.wordpress.com/2008/06/09/successful-mmogs-can-see-1-2-in-monthly-arpu/

[6]
Raph Koster, Metaplace, 3/16/08, http://www.raphkoster.com/2009/03/16/arpu-vs-arppu/

Plus Eight Star: Asian Virtual Goods Market 5 billion USD

+8* – Plus Eight Star, a consultancy firm, has posted a well-reasoned guestimate of the size of the virtual goods market in China, Korea and Japan: 5 billion USD! Contrast this with our guestimate in 2007 that the global virtual goods market was worth 2.1 billion USD. Some other estimates and revenue figures can be found here.

Two completely peripheral issues I feel like commenting on in +8*’s excellent post:

1) +8* insists on using the term “digital goods” instead of “virtual goods”. In my opinion this is a bad idea, because the term digital goods is already reserved for another purpose: to describe any goods that are stored in an electronic format, such as music or movies. See e.g. Webopedia’s definition of digital goods (c.f. my discussion of “information goods” (aka digital goods) vs. virtual goods in this paper).

2) +8* has noticed how difficult it is to define virtual worlds, and also that virtual goods exist in services other than virtual worlds. I think the next logical step is to stop trying to frame the discussion in terms of virtual worlds, and to instead focus on virtual goods as the central concept, as e.g. VERN and Virtual Goods News are doing.

Via Virtual Goods News.

Perceived fairness in micro transactions

I am currently working on my masters thesis on the perceived fairness of micro transactions in online multiplayer games.

My aim is to conduct interviews with players and examine their opinions on the specific game’s micro transaction system. However, I am having a hard time finding respondents and was wondering if anyone in here knew where to find them?

Currently I am not locked down on the specific game, but only that it has to have a dual currency system (as for example in Puzzle Pirates or Combat Arms).

Great blog btw!

Cheers
Daniel

New contributors and guests at the VERN blog

We are happy to welcome two new regular contributors to the VERN blog: Taiyoung Ryu and Juha Tolvanen. Welcome!

Taiyoung Ryu is doing research on the design of micro-transaction business models, especially virtual goods, as a graduate student at the Interactive Media Division at University of Southern California USC. He has presented at GDC and DiGRA, and his advice for developers has been published in the Game Developer Magazine. Before joining USC, Taiyoung had a successful career as a game designer in the Korean game industry and is credited as Lead Designer in six titles, including mobile, casual online and online FPS (see video below). He is the co-author of two books on game design and programming that are used as teaching materials in Korean universities. Taiyoung occassionally consults Western game developers on the item payment model, most recently doing a project for Ubisoft. At VERN, Taiyoung will be our resident expert on the Korean market, replacing Jun-Sok Huhh, who continues as a guest contributor.

Video: Take Down the First Mission, published by Hanbit Soft in Korea and Japan, 2007

Juha Tolvanen is our latest recruit to the virtual economy research team at HIIT, where he will be working on analysing massive amounts of virtual economy data in the AVEA project. Juha is a talented grad student with a gamer background, majoring in both economics and mathematics at Univesity of Helsinki. At VERN, Juha will most probably focus on internal economies and economic experiments, replacing our previous virtual economist Tuukka Lehtiniemi. I’ll let Juha tell more himself once he is settled down.

Also, we have recently published two excellent guest articles. Gamer, consultant and economics grad student Eino Joas asks whether secondary markets are profitable for item sales based businesses, seeking answers from existing work in mainstream microeconomics. Game security consultant, blogger and author Steven Davis provides an overview of game commerce from virtual item sales to gold farming. More guest articles featuring new, insightful perspectives to virtual goods, currencies and economies are in the pipeline.

VERN editors
Vili Lehdonvirta
Juho Hamari

Virtual Economy at GDC2009

Game Developers Conference 2009 took place at Moscone Center in San Francisco USA in March 23. One of important keywords from this year’s Game Developer Conference is digital distribution of video games. So, many sessions dealt with issues related to digital distribution like virtual economy models, new revenue models for casual games distributed via console networks including PSN, XBLA. In addition, virtual goods trades and how to make more money through various new distribution methods were focused by a number of sessions.

At his keynote lecture, Iwata Satoru, the CEO of Nintendo announced that Nintendo’s new handheld platform, Nintendo DSi will implement a digital distribution service. Especially, he announced that the new sequel of one of Nintendo’s biggest franchises, The Legend of Zelda will be only available through the digital distribution. The fact that they adopt a digital distribution model for their most profitable handheld platform means they will change their main distribution method from package selling to digital distribution. This change implies that there will be more possibilities of virtual goods trades and microtransaction models for mobile game platforms. Actually, Sony PSP, Apple Iphone have implemented digital distribution methods as well as Nintendo DSi.

Among various summits at GDC 2009, Worlds In Motion Summit deals with virtual worlds in video games and methodologies to integrate socialization into video games. At this year’s Worlds In Motion Summit, a wide range of issues about virtual worlds and virtual economy were discussed. At the first session, Sulka Haro, the creator of Habbo Hotel talked about success factors of Habbo Hotel. He explained how Habbo Hotel’s game mechanics which has no rules creates social game plays and dynamic interactions between users. At the second session, Don Choi, the CEO of OGPlanet gave a lecture about the free-to-play business model of OGPlanet, describing how and why it has been successful. Also, he talked about maintaining balance for games having microtransaction system and in-game shops. In addition, Erik Bethke from GoPets and Andrew Schneider from Live Gamer discussed about optimal design methods for real money trading. They emphasized that a game design that encourages users to socialize each other and make virtual communities will enhance the revenue from real money trading. Also, they mentioned the importance of balance between primary item markets and secondary markets. Sibley Verbeck, the CEO of Electric Sheep talked about real money trading as well at his session. He focused on user-generated contents in online games for kids.

Some sessions at Business and Management Track dealt with virtual economy issues as well. Case studies about social games by Kristian Segerstrale, the CEO of Playfish were very instructive. He gave a lecture about five key lessons learned from developing social networking games and explained why those lessons matters for the future of overall game industry as well as social networking services based on his game projects. His five lessons were as follows. 1. The era of franchises may be over. 2. All games will become services. 3. Marketing by numbers will become important. 4. Game designs will change into multiplayer-driven. 5. Game developers have to listen to their users.

A round table session called Free to Play, Pay for Stuff: Virtual Goods Explored coordinated by Daniel James from Three Rings and Matt Mihaly from Sparkplay Media was useful as well. During the session, many game developers discussed various issues about microtransactions and virtual goods trading like secondary market issues and multiple-currency issues.